Forcing contractors to work through offshore intermediaries

Tue, 13 Apr 2010 | By Kevin Barrow

Is it lawful for staffing businesses to force contractors to work through a particular offshore intermediary or not get any future work?

Kevin Barrow, a partner in law firm Osborne Clark offers the following advice…

It is not necessarily unlawful for end users and staffing businesses to force a contractor to operate via a particular intermediary and many have started adopting preferred supplier lists (PSLs) of umbrella companies and the like.

However, if they are forced to operate via a particular intermediary (and are told that getting or keeping an assignment is dependent upon this), then it is possible the judgement in Muscat v Cable & Wireless applies, which could well render the individual the employee of the end user for employment rights and tax purposes.  

In the Muscat case the Court of Appeal took the view that where an end user required a particular contractor to operate via a particular intermediary, that was evidence that the contractor was regarded as a chattel of the end user and, in reality, an employee of the end user rather than of the intermediary. Non-specialists advising in this area frequently overlook this ’deemed employment’ risk.

There are potential further problems. If the intermediary is offshore there is a serious risk that it will be operating a scheme which HM Revenue & Customs regard as unlawful and as such the contractor (and the referrer, whether end user or staffing company) may face action by HMRC under the Managed Service Company tax debt transfer regime, and may even face prosecution for tax evasion or money laundering. Tax debt transfer risk is particularly high where the hirer or staffing company charges a referral or artificially high administration fee to the intermediary.

Lawyers at Osborne Clarke have over the years looked at numerous ’offshore’ payment arrangements and, notwithstanding frequent claims that the schemes have been vetted by tax counsel, have yet to see one (relating to workers working in the UK) which is without tax risk. It is of course true that HMRC have not been seen to take frequent public action against the participants in these schemes but that does not mean they have not and will not take action, especially as crackdowns on tax evasion and tax avoidance become more of a political and economic necessity for the UK.

And it is arguable that if the intermediary through which a contractor is force to contract fails (like Albany) then the individual will have a negligence claim against whoever forced them to operate via that intermediary, especially where the intermediary is shown to have paid a referral fee to the relevant staffing company or end user.

So, what is best practice given that end users and staffing companies are understandably worried (post Albany etc.) about what happens if the umbrella company through whom they pay workers goes bust and/or fails to pay HMRC all sums due to HMRC?

The general rule is that contract workers and staffing companies and end hirers should be very careful indeed about payrolling arrangements through an offshore entity (which HMRC is very much looking out for).

- they should carry out regular checks on the credit worthiness of any onshore or offshore intermediary they recommend or through whom (recommended or not) a material number of their contractors are paid,

- they also should take reasonable steps to show they have checked the tax compliance of any such intermediary. This can be a costly exercise because, notwithstanding the best efforts of organisations like FCSA and Professional Passport (who seem each to be trying to introduce some sanity to this difficult area), there is as yet no ’approved audit standard’ and HMRC do not generally ’approve’ schemes (whatever some intermediaries sometimes claim). Therefore the safest approach is to take advice about key checks from a qualified solicitor or other qualified and insured expert.

PSLs of vetted intermediaries are not a bad thing because it is obviously less risky to engage contractors via intermediaries in respect of whom some (rather then no) checks have been carried out, and if a free for all is allowed then the staffing company will not have time to check everyone. However, recommendations have to be handled with care.